In this article, we will be elaborating on the basic of candlestick chart, how to interpret it, and understanding their basic components. With this, traders will learn the essentials of the key components to each candle, what they indicate and to apply candlestick chart analysis to their trading strategy.
What is a Candlestick Chart?
The candlestick chart is originated by the Japanese, way before the West developed the bar and point-and-figure charts. Homma, the Japanese man behind it discovered that, despite the link between the price and the supply and demand of rice, the markets were strongly influenced by the emotions of traders.
Candlesticks portray that emotion are visually representing the size of the price movement with different colors.
Traders will utilize the candlestick to support their trading decisions according to a forecast of the short-term direction of the price which is often a consistent pattern.
To further elaborate, a candlestick chart is a chart composed of individual candles, which traders use to understand price action. The candlestick price action involves pinpointing where the price opened for a period, where the price closed for a period, as well as the price highs and lows for a specific period.
Price action signifies all the financial market clues, trends and reversals for traders to interpret. Hence, candlesticks are used by traders to determine possible price movements based on past patterns as they show four price points (open, close, high, and low) throughout the period the trader specifies.
Interpreting Candlestick Components
Similar to the bar charts, the candlestick shows the market’s open, high, low and close price for the day. The black filled body indicates that the close was lower than the open. While the empty body indicates that the close was higher than the open.
Traders are able to alter these colors in Doo Prime’s trading platform. For example, a down candle is often red filled instead of black, and the up candles are usually green filled instead of white.
The line below and above the body represents the “shadows” or “wicks”. The shadows illustrate the high and low prices of that day’s trading. On the other hand, when the upper shadow on a down candle is short, it means that the open on that day was near the high of the day.
A shorter upper shadow on an up day signifies that the close was near the high. The relationship between the days open, high, low, and close dictates the illustration of the daily candlestick. Thus, the body and shadows can vary from long or short to the shade of it.
Candlestick vs. Bar Charts
Bar charts and candlestick charts present identical information but are display differently virtual wise. Candlestick charts show a more distinct view over the bar chart as they are more visual, due to the color coding of the price bars and thicker bodies. With those features, it highlights the difference between the open and the close clearly.
The above is an example view of a bar chart and a candlestick chart with the same exchange-traded fund (ETF) over the same period. Visibly, the upper chart with colored candlestick bar is more appealing than the lower bar chart. However, some traders prefer the looks of the bar chart as it has a cleaner look as compared to the candlestick chart.
Basic Candlestick Patterns
The upwards and downwards movements in the price forms the structure of the candlestick. Although these price movements may come across being nonlinear, but subsequently, they turn into a regularly occurring patterns that help forecast the short-term direction of the price. Traders usually determine their trading decisions through this forecast. However, there are many existing candlestick patterns in various fashion.
Patterns are sub-divided into bullish and bearish. Bullish patterns mark that the price is seemingly rising, while bearish patterns mark that the price is probably falling. Nonetheless, the candlestick patterns symbolize inclination in price movement, not guarantees.
Additional Tips on Reading Candlestick Charts
When reading and interpreting the candlestick charts, traders and investors should keep an eye on:
– The timeframes of trading
– Classic Price Pattern
– Price Action
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